We provide information below on mortgage types:
- Variable, Tracker, and Fixed interest rate
- We also explain the meaning of the APR
rate and its importance.
The repayment/annuity mortgage is the most
common one. Each month the borrower repays both monthly interest
and a portion of the loan amount. Repayments in the early
years of the mortgage are mainly comprised of interest. The
balance of the mortgage loan owed decreases as the period
progresses, until the loan is fully paid at the end of the
Pension Backed Mortgages
Pension mortgages are similar to investment
interest-only mortgages. A pension plan supports the mortgage
instead of an endowment policy. The product is generally only
available to the self-employed or persons in non-pensionable
employment, or Company Directors.
The lump-sum portion of a pension plan is
used to repay the mortgage principal at mortgage maturity,
timed to coincide with retirement.
The borrower has the unique advantage of gaining
dual tax relief at the highest tax rate on the pension premiums
which are all the "capital" repayments, and may
also gain tax relief on the mortgage interest.
This can be the most tax efficient mortgage
method for suitable borrowers.
The investment type of mortgage was a popular
option in past years when returns were better at a time of
high interest rates and better investment returns.
The product is an interest only mortgage that
is supported by an investment or endowment policy. The borrower
pays only interest during the term of the mortgage and the
loan amount remains outstanding until the end of the term.
Premium payments are payable on the investment/endowment policy
during the term. The investment/endowment type policy is similar
to a life assurance investment/savings policy that is designed
to provide an amount to repay the mortgage at the end of the
In recent years, shortfalls in the amounts
available to pay off loans, have made this mortgage product
However, if the investment/endowment policy
is calculated correctly, and contains suitable guarantees,
and matures to an amount greater than the mortgage loan at
term end, then the net policy maturity balance is paid to
the borrower, less any taxes, in addition to paying off the
mortgage (for policies taken out prior to 2001 the policies
paid their lump sums free of any exit tax). Generally, these
policies are not guaranteed and may generate a mortgage balance
shortfall at maturity date of the mortgage.
The interest on variable rate loans can rise
or fall depending on changes decided by the lending institution.
Rate changes are mainly determined by base interest rates
set by the European Central Bank (ECB). If you can "live"
with a varying interest rate and the fluctuating repayment
amounts, then this may be a better, lower cost repayment option
in the long term.
The best type of variable rate mortgage is
the "Tracker" Mortgage. This is linked directly
to the ECB rate.
The interest on fixed rate loans are fixed
for a specified term generally ranging from one to ten years.
During the fixed period, payments remain constant. The rate
on a 20 year mortgage can be fixed for say 1, 3 or 5 years
when interest rates are unlikely to fall, thereby ensuring
constant payments during the period.
At the end of the fixed period, the borrower can choose to
fix the rate for another period, using the rate prevailing
at that time. Alternatively, the option of the variable rate
If in the course of the agreed fixed period,
the borrower wishes to pay back the loan or change the agreed
rate, a redemption fee (break funding fee) is normally payable.
Generally, it may be more costly in the long
term to fix rates as the Lender has to set a fixed rate projected
above the long term rate expectations, so as not to loose
money. However, fixed rates provide the borrower with peace
of mind security - especially against the experience of a
number of years ago when rates reached above 15%. However,
this is unlikely in the present market climate.
The Annual Percentage Rate (APR) takes account
of cost outlays that are payable at the beginning of a mortgage,
which are additional to the interest payable. This is why
the APR is higher than the related standard rate.
The APR is important as it enables realistic
comparisons between the offerings of different lenders. For
example, a special low start-up rate may be on offer to new
customers for a fixed period. As the rate paid at the outset
does not reflect the real cost of the loan, the APR informs
the borrower of the annual percentage interest rate that may
have to be paid in the future.
Warning: Your home is at risk if
you do not keep up payments on a mortgage or any other
loan secured on it.
Interest only Mortgage:-
Warning: The entire amount that you
have borrowed will still be outstanding at the end of
the interest-only period.
Variable-rate residential mortgage:-
Warning: The cost of your monthly
repayments may increase - If you do not keep up your
repayments you may loose your home.
Fixed rate mortgage or loan:-
Warning: You may have to pay charges
if you pay off a fixed-rate loan early.